The problem named: from the rescue of UBS to the expert commission

The mandate of November 2009

The phrase “too big to fail” had circulated in American banking policy since the rescue of Continental Illinois in 1984, but the crisis of 2008 gave it a new urgency across the world. In Switzerland the diagnosis was stark. In an article published at the end of 2010, Michael Ambühl, then State Secretary for International Financial Matters, and his colleague Ulf Lewrick wrote that UBS and Credit Suisse together accounted for roughly one third of domestic lending and deposit business, and that before the crisis their balance sheets had exceeded Swiss gross domestic product by a factor of about 4.5. Because the state could not allow such institutions to fail without endangering financial stability, the authors continued, an implicit state guarantee arose that distorted competition and exposed taxpayers to considerable risks.¹ That sentence contains the whole theory of the regime in miniature. The rescue itself had been justified by the size and interconnectedness of UBS, which is precisely why it created an expectation that would outlast it.

On 4 November 2009, a little more than a year after the rescue, the Federal Council announced that it had set up an expert commission to examine the economic risks posed by large companies. The commission, which was to include representatives of the authorities, of academia and of private industry, was to propose approaches for mitigating the “too big to fail” problem.² The general wording of the mandate is worth noting. Although the commission was known from the start as the TBTF commission and dealt almost exclusively with the two big banks, its formal remit covered large enterprises in general. The choice reflected the political sensitivity of the moment. Because the Confederation had just been obliged to support one bank, a commission devoted expressly to banking regulation would have been read, at home and abroad, as a verdict on the whole financial centre.

The chairman was Peter Siegenthaler, who had until shortly before directed the Federal Finance Administration and who was therefore intimately familiar with the fiscal consequences of the UBS rescue.³ Siegenthaler’s commission worked with a mixture of officials from the finance department, the Swiss National Bank and the supervisory authority FINMA, academics, and representatives of the banks themselves. The presence of the banks was criticised by some on the left, who suspected that the industry would water down the proposals. In practice, the inclusion of UBS and Credit Suisse had a paradoxical effect. It bound the institutions to a consensus that they could later hardly disown. It also gave the commission access to technical knowledge on capital instruments and legal structures that the administration did not possess.

The interim report of April 2010

The commission published an interim report on 22 April 2010. It recommended a revision of banking law designed to ensure that the state would not again have to rescue a large bank. Higher capital and liquidity requirements for systemically important institutions were to be combined with organisational measures that would allow systemically important functions to be separated from the rest of the bank in a crisis without state intervention. UBS and Credit Suisse were identified as the two institutions concerned. The commission rejected, as too rigorous, the idea of imposing an absolute limit on the size of banks through caps on their balance sheets or market shares. Siegenthaler himself warned that the commission had only outlined a framework and that the concrete measures still had to be defined.⁴

The reactions foreshadowed the political lines of the following two years. The Christian Democrats, the Liberals and the Social Democrats welcomed stricter capital and liquidity rules. The Greens and the Swiss Trade Union Federation found the proposals insufficient, the federation’s chief economist, Daniel Lampart, regretting that the report contained no figures for the capital requirements. Economiesuisse, the business federation, asked for more time and a slower pace until the final report was available.⁵ The rejection of size caps and of a formal separation of investment banking from retail banking was the decisive strategic choice of the interim report. It meant that Switzerland would attempt to neutralise the consequences of size through capital and planning, leaving the banks free to decide their own business models. Debated ever since, that choice returned with full force after 2023.

The final report of 30 September 2010

The commission delivered its final report to the Federal Council on 30 September 2010. In the interview he gave to Die Volkswirtschaft two months later, Siegenthaler summarised the package as a set of measures covering four fields: capital, liquidity requirements, risk diversification and organisational arrangements for an emergency.⁶ The four fields were meant to operate together. Capital and liquidity would reduce the probability of failure. Risk diversification rules would limit the interconnectedness between the big banks and other institutions. The organisational measures would ensure that, if failure nevertheless occurred, the functions on which the Swiss economy depended could be continued without the state.

The capital proposals attracted most attention, because they went far beyond the Basel III standards that the Basel Committee on Banking Supervision was finalising in the same months. The commission proposed a total requirement of up to about 19 per cent of risk-weighted assets for the two big banks, composed of three layers. The base layer corresponded to the international minimum of 4.5 per cent in common equity. A buffer of 8.5 per cent was to consist of at least 5.5 per cent common equity and up to 3 per cent of contingent convertible bonds that would convert into equity if the common equity ratio fell below 7 per cent. A progressive component of up to 6 per cent, which depended on the size and market share of the bank, could be met with convertible instruments with a lower trigger of 5 per cent.⁷ In round figures, the formula required about 10 per cent in common equity and about 9 per cent in convertible capital. Finance Minister Eveline Widmer-Schlumpf compared the proposed 19 per cent with the Basel III level of 10.5 per cent when she presented the draft legislation in April 2011.⁸

The use of contingent convertible bonds was the most original element of the package. Such instruments, commonly abbreviated as CoCos, are debt securities that convert automatically into shares or are written down when a predefined trigger is breached. They allow a bank to hold part of its loss-absorbing capacity in a form cheaper than shares, while ensuring that the capacity becomes equity at the moment it is needed. In 2010 the market for such instruments barely existed. The commission therefore also proposed tax measures to make it possible to issue them from Switzerland, since the Swiss stamp duty on the issuance of securities and the withholding tax on interest would otherwise have driven issuance to foreign vehicles. The Swiss approach helped to create a new asset class, which the big banks and later other institutions issued in considerable volumes in the following decade. The fate of these instruments in March 2023, when the additional tier 1 bonds of Credit Suisse were written down, gives this part of the story a particular irony.

The organisational proposals rested on the concept of the emergency plan. Each systemically important bank was to prepare, and demonstrate to the supervisor, a plan showing how its systemically important functions in Switzerland could be transferred to a separate legal entity and continued without state support if the bank became insolvent. Ambühl and Lewrick explained that the banks would have to show how these functions could be carried over to a “carrier entity” and how the necessary organisational restructuring and the insolvency-proof treatment of creditors could be achieved.⁹ The commission did not require the banks to reorganise in advance. Leaving them free to choose how to reach resolvability, it proposed to reward them with lower capital requirements if they improved their resolvability beyond the minimum. This combination of obligation and incentive became a hallmark of the Swiss regime and, as later sections show, a source of lasting controversy.

Notes

1. Michael Ambühl and Ulf Lewrick, “Too big to fail: Herausforderungen für die Schweiz”, Die Volkswirtschaft, December 2010, https://dievolkswirtschaft.ch/de/2010/12/ambuehl/. Ambühl headed the State Secretariat for International Financial Matters (SIF), which had been created in 2010 within the Federal Department of Finance. ↩
2. Federal Council, press release “Bundesrat setzt Expertenkommission zum Thema ‘too-big-to-fail’ ein”, 4 November 2009, https://www.admin.ch/de/nsb?id=29925. ↩
3. Geli Spescha, “Im Gespräch mit Peter Siegenthaler, Präsident der Expertenkommission Too big to fail”, Die Volkswirtschaft, December 2010, https://dievolkswirtschaft.ch/de/2010/12/siegenthaler/. ↩
4. swissinfo.ch, “CH/Expertenkommission ‘Too Big to Fail’ legt Zwischenbericht vor (Zus)”, 22 April 2010, https://www.swissinfo.ch/ger/ch-expertenkommission-too-big-to-fail-legt-zwischenbericht-vor-zus/8732868. ↩
5. swissinfo.ch, “CH/Expertenkommission ‘Too Big to Fail’ legt Zwischenbericht vor (Zus)” (as above). ↩
6. Spescha, “Im Gespräch mit Peter Siegenthaler” (as above). The four fields are named in Siegenthaler’s own words: “Eigenmittel, Liquiditätsanforderungen, Risikoverteilung und organisatorische Vorkehrungen für den Notfall”. ↩
7. Sandro Abegglen, Philippe Weber, Daniel Bono and Andrea Huber (Niederer Kraft & Frey), “Too big to fail and Basel III: Switzerland at the forefront”, in Capital Markets Handbook 2011, https://www.nkf.ch/app/uploads/2022/09/Too-big-to-fail-and-Basle-III-Niederer-Kraft-Frey-Ltd.pdf. The authors describe the buffer layer as 5.5 per cent common equity plus 3 per cent “high-trigger” CoCos converting at a 7 per cent common equity ratio, and the progressive component as up to 6 per cent that could be met with “low-trigger” instruments converting at 5 per cent. ↩
8. swissinfo.ch, “Gesetz gegen künftiges ‘too big to fail’”, 20 April 2011, https://www.swissinfo.ch/ger/schweizer-politik/gesetz-gegen-kuenftiges-too-big-to-fail/30048728. ↩
9. Ambühl and Lewrick, “Too big to fail: Herausforderungen für die Schweiz” (as above). ↩

For general information only. This article does not constitute legal or tax advice, does not replace advice on an individual case and creates no lawyer-client relationship. It reflects the legal position as of September 2025.